UK - The government has rejected calls to abolish the compulsory purchase of annuities because pensioners are "poor judges" of their spending.
An amendment to the Pensions Bill that would have scrapped the obligation to buy an annuity at age 75 was dismissed by pensions minister Baroness Hollis.
Annuities have been criticised for being too expensive and for paying out insurance companies upon the death of the annuitant, rather than the individual’s desired beneficiary.
But Hollis said: “There is academic evidence that the requirement to secure an income produces a welfare gain, as people are poor judges of their own life expectancy and would therefore tend to consume capital at the ‘wrong rate’.
“None of us knows when we will die, but an annuity provider can pool this mortality risk and get better value overall.”
She added that removing compulsory annuity purchase for defined contribution scheme members would encourage final salary members to switch over to DC schemes just before retirement, and strip the tax relief offered under annuity purchase.
She also pointed out that the government was making annuities more flexible through limited-period annuities, value-protected annuities and the alternatively secured pension.
But Tory peer Lord Higgins rejected her argument. He said: “There is no reason why you should suddenly find that individuals spend all the money and end up on social security benefits.
“People are receiving far less income from annuities than they were expecting because annuity rates have plummeted under this government.”
London School of Economics governor and former government pensions adviser Ros Altmann said forcing annuity purchase was “absolutely unfair” and discriminated against most people.
“Eighty per cent of people buy an annuity with a pension of less than £30,000, but advisers do not give advice for pots under £50,000, so nobody is helping them buy the right product.”
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